Trump’s record $1.5 trillion military budget for a “world war”? Defense stocks rebound sharply, drone manufacturers surge by double digits

Recent statements by U.S. President Donald Trump have triggered huge volatility in U.S. defense stocks. After Trump threatened to restrict dividends and buybacks from defense contractors, defense giants closed lower across the board on Wednesday. Following his remarks about sharply increasing defense spending, multiple defense stocks rebounded strongly on Thursday, reflecting investors’ bets that a potentially record-breaking U.S. government defense budget could bring more orders to the industry.

According to Xinhua News Agency, Trump posted on social media on Wednesday night, June 7, that U.S. defense spending for the 2027 fiscal year should be raised from $1 trillion to $1.5 trillion. This would mean that U.S. defense spending would surge more than 50% from this year's record budget of $901 billion. Trump said this move would help the U.S. build a "dream military" and ensure the country's safety in "turbulent and crisis-ridden" times.

Trump’s massive defense spending proposal has led to warnings in U.S. media. According to Xinhua, former Fox News host Tucker Carlson said on the 7th that Trump's plan to increase defense spending to $1.5 trillion signals that the U.S. might be preparing for a "world war." This scale of budget indicates "characteristics of a country preparing for global or regional conflict."

The sharp fluctuations in defense stocks highlight the direct market impact of potential policy statements in Trump’s second term. From seizing Russian oil tankers and raiding Venezuela to considering deploying U.S. troops to control Greenland, the Trump administration has increasingly used the military to achieve diplomatic goals, leading the defense sector to undergo a new round of revaluation. U.S. defense stocks have performed strongly over the past 12 months, with the iShares U.S. Aerospace & Defense ETF (ITA) surging more than 50% as of Thursday morning trading.

Strong Bounce in Defense Stocks

U.S. defense stocks surged across the board on Thursday, completely recouping the prior session's losses and hitting new highs.

Lockheed Martin (LMT) was up over 9% in early trading Thursday, Northrop Grumman (NOC) up nearly 11%, L3Harris (LHM) up nearly 9%, Raytheon Technologies (RTX) up nearly 6%, General Dynamics (GD) up over 6%, though all later retreated part of their gains.

Small drone technology company Kratos Defense & Security Solutions (KTOS) jumped nearly 9% at the open, reaching up to 20% at the end of morning trading, and maintained a gain of over 10% at midday. Three other military drone firms, AeroVironment (AVAV), Ondas (ONDS), and Red Cat (RCAT), hit day highs of nearly 17%, almost 24%, and nearly 22% respectively in early trading, and saw gains of less than 10% and over 10% for the rest at midday.

This rebound was rapid and fierce. On Wednesday, Trump requested defense contractors to cease stock buybacks and dividend payments before responding to his calls for faster and more reliable production of military equipment, singling out Raytheon with comments like “either step up and begin more upfront investment in factories and equipment, or you will no longer do business with the Department of Defense.”

This statement led Lockheed Martin to close down 4.8% Wednesday, Northrop Grumman down 5.5%, Raytheon down 2.5%, and General Dynamics down 4.2%.

Global defense stocks rose in tandem Thursday. Goldman Sachs’ Europe defense stock basket soared up to 3.8% Thursday, with a weekly gain of about 15%. Shares of UK’s BAE Systems jumped over 7% at one point, Germany’s Rheinmetall rose over 4% to the highest since October last year. In Asia, Hanwha Aerospace of South Korea, Taiwan’s Aerospace Industrial Development Corporation, and Japan’s Toyo Industry all gained.

Budget Increase Triggers Doubts

A 50% budget increase as proposed by Trump is extremely rare in history. Capital Alpha Partners analyst Byron Callan pointed out that the last time the annual U.S. defense budget rose 50% was during the Korean War in 1951, while increases during the Reagan administration in 1981 and 1982 were just over 20%.

This proposal faces multiple challenges to feasibility. The U.S. Congressional Budget Office (CBO) estimates that the budget deficit this year will be 5.5% of GDP. Last November, CBO projected that tariff revenue over the next 11 years would only amount to $2.5 trillion, averaging about $230 billion per year, far short of the expected $500 billion annual defense spending increase.

Wallstreetcn reported that Trump claimed Wednesday that the “huge revenue” from tariffs would allow the U.S. to “easily reach” the $1.5 trillion defense spending goal, claiming the tariff income would not only cover defense increases, but also let the U.S. reduce national debt and pay “generous dividends” to middle-income Americans. However, tariff revenues are estimated at around $400 billion in 2026, showing a clear gap between new defense spending and other promises.

Politically, without budget reconciliation, a $1.5 trillion budget would need to meet a 60-vote threshold in the Senate to pass. If reconciliation is used, only 50 votes are needed, but cost offsets are required. Callan pointed out that even if the increase was distributed over fiscal years 2027–2030, “we are unsure whether defense contractors can absorb such a scale of growth.”

Wall Street Cautiously Optimistic

Despite uncertainty, analysts generally believe that the direction of U.S. defense spending growth is clear. Douglas Harned, an analyst at Bernstein, said: “The direction of spending is clear—that is higher. At the same time, scrutiny on companies will also be stricter.”

Morgan Stanley analyst Kristine Liwag wrote in a research note that restricting capital returns is a “incremental negative, but manageable in scale.” She added that if dividends and buybacks are restricted, this could free up billions for capital expansion or M&A investment.

JPMorgan analyst Seth Seifman said Wednesday: “Overall, this administration’s comments can sometimes be harsh, yet they communicate a core intent. In this case, the comments about buybacks and dividends and the subsequent executive orders reinforce an already clear effort to get major defense firms to ramp up investment, an effort which could yield some results.”

L3Harris CEO Chris Kubasik sent a message to all employees shortly after Trump’s post: “The demand for military capability is increasing, with expectations for our industry higher than in decades. We’re not sitting on the sidelines—we’re in the thick of it, and what we do matters.”

Tony Bancroft, portfolio manager for the Gabelli Commercial Aerospace and Defense ETF, said: “$1.5 trillion is a big number, but the world is changing.” He noted that geopolitical instability is driving higher spending, “The world is becoming a dangerous place.”

Saxo Markets UK investment strategist Neil Wilson said: “Geopolitics is the story of 2026 so far.”

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